Author Topic: Should I refinance our house?  (Read 3900 times)

Mr. FI

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Should I refinance our house?
« on: April 08, 2016, 03:42:11 PM »
Hello,

While it looks like the majority of topics in this specific forum are geared toward investment properties, I believe my question fits in the purpose of the forum.

So my question is: Back in 2013, my wife and I bought our first home. So eager to be home owners and take advantage of the low rate environment (which I was sure have gone up by now, whoops), we only saved up a 5% down payment. Enough to get a 30 year conventional loan, but we did take on private mortgage insurance. It currently costs us $144/mo.

Our monthly payment breakdown is: $850 for principal/interest, $193 for property taxes, $144 for PMI and $92 for home insurance. So about $1280. My understanding is that at 80% LTV, I can request for the PMI to be dropped. At 78% LTV, it would automatically fall off (this is according to my bank).

Currently, I owe $170,828 and when we bought the house, it was appraised at $195,500. It's probably worth at least $220,000 based on the market and the updates we've made. But because the value is still listed at $195,500, we're only at 87% LTV.

So I am weighing a couple options. One is have the house reappraised. Talking to a lender at my bank, they said the LTV would need to hit 75% in the case of an appraisal for the PMI to drop. Not sure why that is, but it was a pretty quick inquiry I made, so that may not be 100% accurate. To get to 75% LTV, the house would need to appraise at about $227,500. That is probably pushing it at this point. The cost of the appraisal would be $650 and take 6 or so weeks to come in.

The second option is to refinance. With the rate environment still very low, I have looked into Rocket Mortgage at they would approve me for a bevy of options. I could go to a 10 year, a 15 year, or 20 year with a lower interest rate than I currently have. Those scenarios would mean taking on some closing costs, and I think would increase our current loan amount anywhere from $3500-$6000 depending on what we do. That extra cost would be built into the loan, so it wouldn't be out of pocket.

The upside is, the PMI drops off, I have a lower rate, and my timeline is severed by at least 7 years if I don't make extra payments. The downside is a higher payment, taking on some more money to get that better rate, and having less to invest.

Should I just stand pat and keep paying until the PMI just drops off, or should I try to accelerate the process with one of these options? I have thought about just aggressively paying the mortgage down faster, but that seems silly when both of these options gets me there faster and frees up an extra $1700/yr by not having that PMI payment.


forummm

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Re: Should I refinance our house?
« Reply #1 on: April 08, 2016, 04:13:44 PM »
Could you pay it down to 78% quickly?

If you decide to get a refi, I would shop around for a rate. Rocket isn't known for being the cheapest. You can get a comparison without entering in any personal data at aimloan.com if you know your approximate credit score. For my refi (with aimloan) I didn't have any closing costs (slightly higher rate). It worked for me because I knew I would be paying off the loan within 7-10 years and it was still cheaper to take the higher rate.

Goldielocks

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Re: Should I refinance our house?
« Reply #2 on: April 08, 2016, 04:22:17 PM »
Option 3.. Put down cash to be at 80% of current stated value. No refinance needed. Any prepayment penalty?

It seems that you can afford higher payments. It is only 15k or so.   Treat PMI like cc debt. It is not low interest, after all. 
« Last Edit: April 08, 2016, 04:24:17 PM by goldielocks »

TabbyCat

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Re: Should I refinance our house?
« Reply #3 on: April 08, 2016, 09:47:39 PM »
Following. We just bought in a tough market and went with a more expensive mortgage company because we needed to close quick to win the bid on the house. Our rate is 4% (not terrible, but we could have got 3.5% with VA loan IF we could have won the house with a 45 day close instead of a 25, which we couldn't have - seller confirmed). I guess the right thing to do is to make extra payments and feel good about it, but a big part of me wants to do triple payments this year, refi late this year or next, and get a lower payment. Rates will go up, but if we refi to VA they may even still be lower. Having a lower mortgage payment would give us more security if we dropped to one income (I want to stay home with our baby, but we would have to dial retirement savings back to just around $3k a year and I'm not comfortable with that).

TabbyCat

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Re: Should I refinance our house?
« Reply #4 on: April 08, 2016, 09:53:40 PM »
To be more relevant to your question - I think it's worth it to try to gain equity first before refi if the goal is just to stop PMI. Most lenders require 20% upfront to avoid PMI, but 22% paid down to drop PMI once it's been included in your loan. 25% sounds wrong to me - even if they push that you could argue that 22% is market standard.

If you get an appraisal to apply for PMI removal by value gained, what will it cost you? Will you miss that money, or be glad you tried it? I'd guess around $500-700 for the inspection and fee to submit an application for review (that's what we were quoted as ballpark - we also have PMI but plan to just pay down with extra payments).

If they do push for 25% - can you time you application so that your extra payments make up the difference needed after incorporating anticipated value added at appraisal?

monarda

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Re: Should I refinance our house?
« Reply #5 on: April 09, 2016, 08:39:38 AM »
We've found the best rates at our local banks and credit unions. 

If you can afford the payment, and intend to stay in the house for a long time, AND have a goal to pay off the loan, go to a 10 year or 15 year loan.

If, like many others around here, you like to keep a 'perfectly good mortgage' for as long as possible and invest the difference, then you should not refinance. Your 30 year loan is probably at a good rate. Refinance to a 30 year loan if you can get at least 1% lower interest rate by shopping around. Otherwise as forummm suggests, just pay more principal over the next 6 months to gain more equity. I don't think it's worth paying extra fees (5 months of PMI equivalent?) if you can manage paying the loan down.

Personally, I like to pay off the loan. But I have lower risk tolerance and am older than a lot of folks here.
« Last Edit: April 09, 2016, 10:05:43 AM by monarda »

Jim2001

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Re: Should I refinance our house?
« Reply #6 on: April 09, 2016, 04:56:52 PM »
It's been quite a while since I was in a similar situation and it's probably safe to assume different banks have different rules, but when my house dropped below the stated threshold and I ask to have them drop the PMI, all I got was the run around.  The easiest thing for me was to refinance.

Also, I'm of the opinion of taking out a 30 year loan because it leaves you options.  If you can afford to pay the equivalent of the 15 year payment every month, you can still do that and be out in 15.  If something happens (job loss, car repair, kids need braces) and things are a little tight some months, you might be glad the minimum due is lower.  Yes, it's a slightly higher rates, but for me it was worth it. 

Of course there's also the math of a guaranteed 3.5% rate of return by paying it down early, versus what you can make in the market over the long term to consider as well.  This only works if you are disciplined enough to actually invest it though.

What percentage of your monthly budget is the difference between at 15 and a 30 year payment?

Mr. FI

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Re: Should I refinance our house?
« Reply #7 on: April 11, 2016, 08:59:55 AM »
Could you pay it down to 78% quickly?

If you decide to get a refi, I would shop around for a rate. Rocket isn't known for being the cheapest. You can get a comparison without entering in any personal data at aimloan.com if you know your approximate credit score. For my refi (with aimloan) I didn't have any closing costs (slightly higher rate). It worked for me because I knew I would be paying off the loan within 7-10 years and it was still cheaper to take the higher rate.

Yes and no. If I made this the priority over investing, we could probably pay it down by end of the year. I could certainly look into other places for a refi--my credit is at 770 and my wife's is 797 so we're pretty good on the credit side.

Mr. FI

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Re: Should I refinance our house?
« Reply #8 on: April 11, 2016, 09:01:32 AM »
Option 3.. Put down cash to be at 80% of current stated value. No refinance needed. Any prepayment penalty?

It seems that you can afford higher payments. It is only 15k or so.   Treat PMI like cc debt. It is not low interest, after all.

No, no pre-payment penalty. This has been my MO so far, I was just looking into other options to accelerate it.

Mr. FI

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Re: Should I refinance our house?
« Reply #9 on: April 11, 2016, 09:03:32 AM »
Following. We just bought in a tough market and went with a more expensive mortgage company because we needed to close quick to win the bid on the house. Our rate is 4% (not terrible, but we could have got 3.5% with VA loan IF we could have won the house with a 45 day close instead of a 25, which we couldn't have - seller confirmed). I guess the right thing to do is to make extra payments and feel good about it, but a big part of me wants to do triple payments this year, refi late this year or next, and get a lower payment. Rates will go up, but if we refi to VA they may even still be lower. Having a lower mortgage payment would give us more security if we dropped to one income (I want to stay home with our baby, but we would have to dial retirement savings back to just around $3k a year and I'm not comfortable with that).

Right, it's always tough to weigh these things. I personally would like to have a paid off mortgage for our early retirement date (somewhere in 2025), so we do have to be aggressive either way.

Mr. FI

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Re: Should I refinance our house?
« Reply #10 on: April 11, 2016, 09:06:03 AM »
To be more relevant to your question - I think it's worth it to try to gain equity first before refi if the goal is just to stop PMI. Most lenders require 20% upfront to avoid PMI, but 22% paid down to drop PMI once it's been included in your loan. 25% sounds wrong to me - even if they push that you could argue that 22% is market standard.

If you get an appraisal to apply for PMI removal by value gained, what will it cost you? Will you miss that money, or be glad you tried it? I'd guess around $500-700 for the inspection and fee to submit an application for review (that's what we were quoted as ballpark - we also have PMI but plan to just pay down with extra payments).

If they do push for 25% - can you time you application so that your extra payments make up the difference needed after incorporating anticipated value added at appraisal?

Essentially, because our home equity has gone up since we bought (due to market conditions) a refi would get us in that 78% range. The appraisal would cost us around $650 like I stated in the first post. And yes, I believe we could get to the 25% by the time the app is processed.

Mr. FI

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Re: Should I refinance our house?
« Reply #11 on: April 11, 2016, 09:08:23 AM »
We've found the best rates at our local banks and credit unions. 

If you can afford the payment, and intend to stay in the house for a long time, AND have a goal to pay off the loan, go to a 10 year or 15 year loan.

If, like many others around here, you like to keep a 'perfectly good mortgage' for as long as possible and invest the difference, then you should not refinance. Your 30 year loan is probably at a good rate. Refinance to a 30 year loan if you can get at least 1% lower interest rate by shopping around. Otherwise as forummm suggests, just pay more principal over the next 6 months to gain more equity. I don't think it's worth paying extra fees (5 months of PMI equivalent?) if you can manage paying the loan down.

Personally, I like to pay off the loan. But I have lower risk tolerance and am older than a lot of folks here.

That's tough--we're not sure how long we are going to be in this house. Could be for 20 years, could be for only a couple more. I want to pay off the mortgage for our early retirement date (somewhere in 2025) so we have to be aggressive either way. I thought maybe two birds with one stone as a refi, but I guess having the flexibility of a lower payment in case something changes our income would be nice. But is it nice enough? Not sure.

Mr. FI

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Re: Should I refinance our house?
« Reply #12 on: April 11, 2016, 09:11:32 AM »
It's been quite a while since I was in a similar situation and it's probably safe to assume different banks have different rules, but when my house dropped below the stated threshold and I ask to have them drop the PMI, all I got was the run around.  The easiest thing for me was to refinance.

Also, I'm of the opinion of taking out a 30 year loan because it leaves you options.  If you can afford to pay the equivalent of the 15 year payment every month, you can still do that and be out in 15.  If something happens (job loss, car repair, kids need braces) and things are a little tight some months, you might be glad the minimum due is lower.  Yes, it's a slightly higher rates, but for me it was worth it. 

Of course there's also the math of a guaranteed 3.5% rate of return by paying it down early, versus what you can make in the market over the long term to consider as well.  This only works if you are disciplined enough to actually invest it though.

What percentage of your monthly budget is the difference between at 15 and a 30 year payment?

It would be about a 15% difference. I do understand having that flexibility--but even with paying it like a 15 year, we end up paying more interest+the PMI lasts until the 78% threshold. The refi would cut interest paid, and PMI but would obviously cost more monthly plus some up front.

Fishindude

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Re: Should I refinance our house?
« Reply #13 on: April 11, 2016, 09:11:43 AM »
I would shoot for getting to the point where you can get away from PMI, then refinance for the same length of time you currently have remaining on loan, so in essence nothing has changed, other than your payment going down.   This assumes you get a favorable rate and don't get dinged with a bunch of fees to refinance.

Talk to your banker.

clarkm04

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Re: Should I refinance our house?
« Reply #14 on: April 11, 2016, 09:43:46 AM »
My wife and I were in the same boat.  Bought a house July 2013 with 5% down.  Wanted to do away with the PMI. 

Your mortgage documents should have a section on PMI removal.  Ours was buried on like page 50 out of 73, but there's a section somewhere in your mortgage documents regarding PMI removal.  That's the important information, not a phone call.  Bank representatives can be stunning in the delivery of bad information, so find your contract and read what it has.

The first step to get the PMI removed is typically mailing a formal letter to the bank mortgage department requesting the removal of PMI.  Once that is submitted, the bank will mail you in writing the requirements to get the PMI removed from your loan.

Our mortgage documents (and it seems most) are written that the 78% LTV applies to the original loan agreement, thus if you prepay, you still have to get it appraised.

We ruthlessly paid down our mortgage from July 2013 to March 2014, to hit the 78%.  Mailed in the letter.  There were four requirements we had to meet with one being getting the house appraised since we prepaid.  Financially, it was worth it to get the PMI wiped out so far ahead of time.

When the interest rates dipped in early 2015, we refinanced to a 15-year mortgage which was also a massive savings.

One consideration is to look at where the rates are and do a refinance to a new 30 or 15 if that makes sense to kill two birds with one stone.

Good luck!  PMI sucks and I'm so glad we're not paying for it anymore.


monarda

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Re: Should I refinance our house?
« Reply #15 on: April 12, 2016, 08:06:42 AM »
We refinanced from a 30 year to a 20 year recently. The payments stayed basically the same, because the interest rate dropped.   Talk to your banker - there are all sorts of options. Shorter term loans have lower interest rates. You don't have to go all the way down to 15 year.

Mr. FI

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Re: Should I refinance our house?
« Reply #16 on: April 12, 2016, 09:35:10 AM »
We refinanced from a 30 year to a 20 year recently. The payments stayed basically the same, because the interest rate dropped.   Talk to your banker - there are all sorts of options. Shorter term loans have lower interest rates. You don't have to go all the way down to 15 year.

Yes, I mentioned in my original post I had looked at a 20 year. The rate does go down, but not significantly (I think 3.125 vs 3.75). The trade off is in assuming the closing costs--depending on how low the rate goes--it might still be worth it, but I guess that's why I am gathering opinions here. Thanks!